Leveling The RYO Playing Field

In recent years, roll-your-own tobacco machines have surfaced at various retail locations putting convenience stores at a competitive disadvantage on price.

By Howard Riell, Associate Editor

America, and in particular its lawmakers, remains caught in a love-hate relationship with tobacco. That push-pull has resulted in very well-publicized attempts to dissuade Americans from using tobacco, or at least smoking it. A byproduct of this tug-of-war has been across-the-board tax increases on all things tobacco.

In the wake of the 2009 shift in tax rates, pipe tobacco is taxed at a significantly lower rate than roll-your-own (RYO) tobacco or factory-made cigarettes. As entrepreneurs will, many roll-your-own manufacturers have switched to pipe tobacco, as have consumers. Commercial roll-your-own machines have soared in popularity, giving Americans the chance to save money by using them to make RYO cigarettes with pipe tobacco.

As a result, the federal General Accounting Office (GAO) estimates a significant loss in revenue collection. A report by the Centers for Disease Control and Prevention (CDC) contends that the state of Florida, for instance, missed out on $63 million in tobacco-tax revenue from April 2009 to August 2011 because of a loophole in a federal law that went into effect in 2009. The law made it possible for consumers of RYO cigarettes to pay less in taxes because the type of tobacco they used—pipe tobacco—could be reclassified into a lower tax rate. The tax difference amounted to an estimated $21.95 per pound. The result, according to CDC, was the state lost more than twice as much tobacco tax revenue than any other state.

Texas was next, with an estimated $31 million in lost tax revenue. Nationally, the total amount of state and federal tax revenues not collected in this period exceeded $1.3 billion, according to the CDC report. Eleven states each missed out on at least $10 million in tax revenues.

Closing The Loophole

NACS is among the groups leading the charge for change. The association is urging its members to call on Congress for support of legislation that would close a de facto tax loophole that is allowing customers to mass-produce their own cartons of cigarettes with the lower-taxed pipe tobacco. The legislation would provide regulatory certainty that is compromised by the use of lower-taxed pipe tobacco in RYO machines.

“We want a level playing field,” said Corey Fitze, director of government relations for NACS.

Jason Miko, a spokesperson for the National Coalition of Associations of 7-Eleven Franchisees, pointed out that in February the group reached out to the Arizona House, which was considering HB 2717, a bill that came to be known by its short title, “Cigarette Manufacturers.” It would essentially level the playing field between convenience stores and others that sell traditional cigarette packages and establishments that offer roll-your-own machines for rent.

7-Eleven store owners in Arizona were sent a legislative action alert by the coalition asking them to contact their elected representatives in the State House and ask them to support the bill.

At the same time, Bruce Maples, chairman of the National Coalition, sent a letter to Arizona House Speaker Andy Tobin asking him to take a leadership role on this issue and see the bill through. The coalition also sent a 7-Eleven franchisee from the Phoenix area to testify to the House committee of jurisdiction the day the bill was due to come up for a vote. “The bill was pulled from the agenda that very day,” Miko said.

In March, Maples and others traveled to Washington, DC for a series of meetings on Capitol Hill to fight for franchisee rights. “Against the backdrop of NACS’ Annual Day on Capitol Hill, the Coalition delegation met with key House and Senate staff members, on both sides of the aisle, to discuss a variety of issues, including the roll-your-own issue,” Miko recounted.

Congresswoman Diane Black has introduced H.R. 4134, a bill that would close the so-called loophole in the Internal Revenue tax code relating to the installation of RYO cigarette manufacturing machines at retail locations. The legislation would apply only to cigarettes manufactured through these machines after the bill is enacted, so it would not retroactively punish retailers who have been utilizing these machines by forcing them to pay taxes on goods they have already sold.

NACS is encouraging members of Congress to support the bill, which would clarify that retailers who permit consumers to use commercial RYO machines to produce cigarettes are classified as “manufacturers” of tobacco products.

The passage of this legislation will help Florida and the rest of the country resolve this economically damaging situation and allow retail businesses nationwide that follow the rules to continue to grow.

Garnering Support

So where is the RYO category going?

“This is a battle that is going to come down to the wire,” Maples said. “It could trail off and die, or it could take off like gangbusters. The price disparity on the tax, where they price it as pipe tobacco versus taxing it as RYO cigarettes, is huge. H.R. 4134 is the bill we want to make sure everybody supports.”

It is of interest to note that several states are also moving forward on their own, Miko said, introducing legislation to address this issue, which in most cases is expected to pass and be signed into law. Lawmakers in Tennessee, for example, recently passed legislation that requires RYO tobacco retailers to pay a cigarette tax and a $500 yearly licensing fee for each RYO machine used. Under the law, those businesses would have until July 1, 2013 to comply.

Still, the various involved parties are gearing up, once again, for the inevitable legislative clash. An April 17, 2012 legislative action alert by the National Coalition of Associations of 7-Eleven Franchisees told members the following:

“As responsible retailers, we offer cigarettes that are sold with their proper tax assessments; our licensing fees to offer such products are reflected in those prices as well. However, commercial roll-your-own cigarette machines have recently begun to proliferate, allowing customers in establishments with these machines the ability to produce their own cigarettes at a significant cost savings as they do not pay the additional taxes and the commercial establishments are not subject to additional licensing fees,” the alert said. “An individual who buys cigarettes at our stores pays significantly more (due to taxes and our licensing fees) on his carton of cigarettes than an individual who rolls his own at an establishment offering
commercial rolling machines.”

The coalition praised Rep. Black of Tennessee and urged retailers to continue contacting their state representatives to drive change. “It is important that we gain sponsors for and pass this legislation that will level the playing field for
convenience stores across America,” the alert said.

Retailers Taking Action

In an announcement published by the U.S. Food and Drug Administration, the agency said it intends to issue a “deeming regulation” sometime during the summer of 2012 to cover other tobacco products. The statement by the FDA was included as a part of a solicitation announcement in which the agency is seeking a contractor to identify a list of all tobacco product advertisements in the U.S.

“In short, this announcement means that the FDA plans to issue a proposed regulation covering other tobacco products such as cigars, cigarillos, e-cigarettes, hookahs and possibly smokeless tobacco products,” said Tom Briant, executive director of the National Association of Tobacco Outlets (NATO). “The extent of the proposed regulation is not known at this time, but could have a severe impact on the way tobacco retailers do business.”

The hope is that this tax loophole covering roll-your-own products will also be addressed.

Dave

Getting rid of the machines does not solve the problem. TAX THE TOBACCO…. NACS, NATO and everyone supporting these bills are still going to sell pipe tobacco for the roll your own community. They are just fighting these machines because the company came out with a business model that ensures success by only allowing machines that are in place to not have another machine compete. Just as a franchise does.

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